The successor to Newedge USA, LLC agreed to pay a fine of US $100,000 and disgorgement in excess of US $19,000 to the CME Group to resolve charges that Newedge allegedly pre-hedged potential block trades on six days from November 2013 through January 2014 contrary to Chicago Board of Trade rules. According to the CME Group, on the relevant occasions, traders acting for the firm received solicitations from a counterparty to engage in block trades on CBOT products. However, prior to executing the transactions, the traders entered into separate block trades with a liquidity provider to hedge the firm’s potential exposure, said the CME Group. Separately, the Linn Group, Inc. agreed to pay a fine of US $70,000 for, on two days, simultaneously placing orders to sell and buy the same quantity of the expiring cattle futures contract for a customer. According to the CME Group, the purpose of these purported wash trades was to freshen the customer’s long position in order to delay delivery. Additionally, Credit Suisse International agreed to pay a fine of US $15,000 for engaging in one exchange for related position transaction that purportedly entailed a contemporaneous offset of the related position. The CME Group claimed this transaction was an impermissible “transitory” EFRP and non-bona fide.

Compliance Weeds: Currently, once a party is solicited for a block trade, it cannot disclose the details of the solicitation to any other party except to facilitate the execution of the block trade. This ban is in effect until a public report of the block trade is made by the exchange. Moreover, pre-hedging, anticipatory hedging or trading ahead of any portion of a block trade in the same product or a closely related product is prohibited following solicitation to participate in such transaction. Counterparties to the block trade, however, may initiate trades to hedge or offset the risk of a block trade as soon as they execute the trade, even before the public report of the trade by the exchange. (Click here to access the relevant CME Group Rule 526 and here to access the related advisory notice regarding block trades.) Recently, ICE Futures U.S. proposed a rule change that would permit pre-hedging of block trades under certain circumstances. (Click here for background regarding this proposal in the article, “IFUS and ICE Futures Europe Update Block Trade Guidance” in the June 5, 2016 edition of Bridging the Week.)